Double-Edged Recovery

The late 1990s tech boom left the national office market chock-full of tenants, but innovations achieved during that hasty expansion aren't yielding the same results these days. Technology now appears to be curtailing demand as fewer tenants feel the need to aggressively lease expansion space — the heady formula that knocked national office vacancy down around about 12% by 2000.

“Mobile workers are a big part of this, but increased productivity is also a factor that allows many companies to make do with less space than they needed in the last cycle,” says Prentice Knight, CEO of Atlanta-based corporate real estate trade group CoreNet Global.

An analysis by Property & Portfolio Research and Moody's Economy.com projects mediocre office-using job growth in key metro markets through 2009. The baseline comparison between cumulative office-using job growth from the previous expansion (1996 to 1999) and the current one (midyear 2006 through the end of first-quarter 2009) projects that New York, Boston, Los Angeles and San Francisco will post the slowest job growth over the next three years.

Technology isn't the only culprit, either: PPR projects that many office tenants in expensive markets like New York and Boston will increasingly relocate staff members into lower-cost areas such as Atlanta, Houston and Dallas.

The quantity and quality of office space is changing. During the past 15 years, the average amount of office space has shrunk by roughly 14 sq. ft. per worker. It stood at 202 sq. ft. by mid-year 2004, reports Torto Wheaton Research. That average is expected to drop as low as 195 sq. ft. by 2007.

Companies like Richmond, Va.-based credit card issuer Capital One, which launched a pilot program in 2004 to boost employee mobility by altering the company's work environment, are partly responsible for this trend. Lower occupancy costs are a big part of the aggressive program, which relies on wireless Internet connections, video conferencing and instant messaging technology (among other measures) to connect workers.

The expression “office building” will go away, says Larry Ebert, Capital One's vice president of corporate real estate. The technology allows staffers to work without fixed desks, so the company can support as many as 1,200 people in a 600-seat office building. It works because lounges and conference rooms aren't cordoned off as cubicle farms.

If the first quarter was any indication, however, office-using demand isn't dire. The market tightened through the first quarter with vacancy falling 60 basis points to 14.1% at the end of March, the largest quarterly vacancy decline in six years, says real estate research firm Reis Inc. Effective rents also jumped 2% in that time.

That first quarter performance resonated with Los Angeles-based office landlord Zaya Younan, who believes that many office tenants have squeezed so much efficiency out of their space that they are left with only one alternative: expand.

“Many companies are giving their employees more than one computer monitor in their office, which I believe will increase the amount of space per worker,” says Younan, who owns 5.1 million sq. ft. of Class-A office space.

Despite data that shows office workers using less space, Younan insists that technology will actually boost office demand in coming years. Even if he's right, it's clearly playing a vital role in how end users occupy space.